Another big fall in lending to firms heightens crisis

The urgency of the Government's £80bn efforts to funnel much-needed credit to the economy was underlined yesterday after another big fall in business lending. According to the Bank of England's latest Trends in Lending report, loans to businesses fell by £3bn in the quarter to May.

Net lending to small businesses has been negative for the last year as repayments outstrip new loans, its figures showed. The cost of loans for small and medium-sized businesses also became more expensive as chaos in the Eurozone piled pressure on banks.

Bigger firms are finding the going easier as they can raise funds from capital markets available, but net lending to larger businesses was still down in three of the past four quarters.

The Bank and the Treasury have launched a new Funding for Lending scheme, which will see banks able to borrow funds from Threadneedle Street at well below market rates – as long as they boost lending to business. The more they lend, the cheaper the funds on offer will be.

Christopher Shaw, chief executive of alternative finance provider Platform Black, said: "The banks' claims that they are open for business and willing to lend are sounding ever more hollow. For all the Bank of England's quantitative easing largesse, precious little of the newly created money is getting through to the real economy."

Earlier this week the Business Secretary Vince Cable said that regulatory pressures on banks and lack of demand was making bank lending a "moving and difficult target".

He told the Business Innovation & Skills Select Committee: "Bank lending is not in great shape, but that's not for the want of trying by government."

He added: "We're trying a variety of different mechanisms, but it's an up-hill struggle."

John Cridland, the CBI Director General, responded to the figures: "We need immediate action to boost lending in the economy."